Applying for a Mortgage: Everything You Need to Know

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To apply for a mortgage, you’ll need to provide your financial history, review your loan estimates, and select a lender. Applying with multiple lenders gives you the best shot at securing favorable loan terms. 
Buying a home is a significant investment, and few people have enough cash on hand to complete the purchase in full. You can get the help you need by securing a mortgage. 
A mortgage is a legal agreement between you and your lender. The lender provides you with the money you need to pay for your home, and you agree to pay everything back plus interest so the lender makes a profit.  
Applying for a mortgage isn't as complicated as it sounds. Here's everything you need to know about how to apply for a mortgage, brought to you by home and car insurance broker Jerry
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Gather your personal information   

Before you apply, you'll want to gather all of the personal information you’ll need. You'll save yourself a lot of frustration later if you can assemble the correct documents now. 
Your lender will use your personal and financial information to decide if you can be trusted to repay their money.  
Here’s what you’ll need to apply: 
  • Full name  
  • Dependents, if any  
  • Address history  
  • Total assets  
  • Employment and income information 
  • Credit history and credit score 
  • Two years of W-2s 
  • Recent pay stubs—within the last 30 days 
  • Complete bank statements—2 months  
  • Signed personal and business tax returns (all pages, all relevant schedules) 
If you’re self-employed and don’t have W-2 forms, you can still apply. Instead of W-2s, you'll need to give your lender all copies of your most recent quarterly tax statements or your year-to-date profit/loss statement.  

Fill out the mortgage application 

Fill out all required fields of the application as accurately as you can. 
Once you’ve completed all the paperwork and filled out your application, your lender will ask permission to pull your credit score. Note that a hard inquiry will cause your credit score to drop temporarily.   
Within three business days of submitting your application, your lender will give you a Loan Estimate Form that outlines your prospective:  
  • Loan amount (what you were approved for) 
  • Loan type 
  • Interest rate 
  • Mortgage costs, including hazard insurance, mortgage insurance, closing costs, property tax, etc.  
There are a few different ways to apply for a mortgage. Applying online is the most convenient option. However, if you'd prefer human help with the process, you can apply with a lender over the phone or in person.  

Review your loan estimates 

After applying for loans through several lenders, you'll want to compare the loan estimate forms you received to identify the best deal. 
The most important values to examine are:  
Total cost in 5 years: all of the charges (interest, principal, and mortgage insurance) you'll pay during the first five years of your loan.  
  • Principal paid in 5 years:  the amount of principal, or the money you took out to buy the house, you'll pay in the first five years—interest is not included in this number.  
  • Interest rate: the rate you'll pay the lender in addition to the principal. 
  • APR: Annual percentage rate, which represents interest and added fees. 
  • Percent paid in interest: the amount of interest paid over the life of the loan.  
  • Closing costs: the amount you'll pay to finalize the loan.  
Key Takeaway Make sure all your loan applications specify the same mortgage type so you can make a fair comparison. 

Select a lender 

Carefully look over the closing costs and interest rates you’ve received. You’ll likely get the best overall deal from the lender who offers you the lowest closing costs and interest rate
Contact the lender directly if you have any questions about what the numbers on your loan estimates mean. If a lender is pushy or won't answer your questions, you should take your business somewhere else.  
When you’ve made your pick, notify the lender that you're ready to move forward.  
Your lender will then ask you to pay for a credit report ($12 for a single report or $26 for a joint report) and an appraisal (roughly $400-$500).  

Underwriting: the final stretch  

You've done all the heavy lifting up to this point. Now it's your lender's turn to do their share of the work. Underwriting is the stage of the mortgage process where your lender verifies that you qualify for the loan. 
 Your lender will scrutinize your personal and financial history by combing through your paystubs, contacting your employer, and verifying your tax forms. 
 They may find discrepancies, so be prepared to answer questions and provide additional documents. Make sure you respond quickly to keep the process moving. 
 Key Takeaway The verification stage can take two to four weeks to complete. Any delay on your part can make this step take longer.  

Closing: secure the loan 

After several weeks, your lender will hopefully call you with the good news: "You're cleared to close!"   
You can breathe easy—your loan has been processed and approved. Three days before your scheduled closing date, your lender will send you a Closing Disclosure form. This document will show you the final details of your mortgage costs and will be one of the many forms you’ll sign on closing day. 
Key Takeaway Compare the closing disclosure form with your initial loan estimate to see if it matches the quote. If there are any differences between the numbers listed, ask your lender to explain what caused the change.  

Mortgage terms you should know

 Applying for a mortgage can feel overwhelming, especially if you’re unfamiliar with some key terms. Here is a glossary of the terminology you may encounter:
  • DTI ratio: The debt-to-income ratio is your total monthly debt divided by your pre-tax monthly income. This helps lenders determine if you can repay the loan. Your DTI ratio must be below 43% to be approved for a mortgage.  
  • LTV ratio: The loan-to-value ratio is the percentage of your home's value that you're borrowing in a mortgage. This ratio may affect your approved interest rate, how much you can borrow, and your monthly payments.  
  • Credit score: Your credit score is based on the amount of credit you have and your history of handling it. Making late payments and maxing out credit cards can lower your credit score.  
  • It’s possible to get loan approval with a credit score as low as 500 and a 10% down payment. However, you’ll be subject to higher interest rates and added fees.  
  • Having a credit score of 740 will make it easier to get approved for a loan and to enjoy lower rates.
  • Want to improve your credit score?  Pay your rent and utilities on time and keep your credit balances below 30% to help boost your score.  

Mortgage types

The mortgage types you may be eligible for include:
  • 30-year fixed: a loan with a fixed interest rate that will be repaid over a 30-year payment plan.  
  • 15-year fixed: a loan with a fixed interest rate that will be repaid over a 15-year payment plan.
  • Conventional: a loan that follows guidelines set by government-sponsored enterprises like Fannie Mae and Freddie Mac.  
  • FHA: a loan insured by the Federal Housing Administration.  
  • VA: a loan guaranteed by the US Department of Veterans Affairs. Only active or veteran military personnel and their spouses are eligible for this loan.  
  • USDA: a loan backed by the US Department of Agriculture. These loans are used to finance homes in USDA-eligible rural areas.  

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You can apply for a mortgage through a mortgage broker, mortgage banker, or institutional bank. 
Mortgage bankers handle the entire process in-house, offer a wide variety of programs, and usually have faster closing times and more flexibility to work with unique situations.  
Mortgage brokers work with multiple lenders to provide more options than mortgage bankers. The broker doesn’t provide mortgages but can help you find a mortgage with an external bank.  
Institutional banks are local banks that offer mortgages with lower interest rates if you have a large deposit balance in your existing account. While these banks are convenient, their offerings may be limited.
No credit typically means you don't have a history of handling credit amounts and don't have a credit score. This makes securing a loan harder because you don't have a history of paying loans back.  
If you have no credit, consider applying for one of these loan types:  
FHA loans for first-time buyers or those with a low down payment 
USDA loans for rural buyers 
VA loans for active and veteran military personnel

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